Analysis: Italy refunding ordeal looks a little less daunting

Fri Jan 20, 2012 4:33am EST
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By Valentina Za

MILAN (Reuters) - Italy's goal of refinancing some 90 billion euros of long-term debt by the end of April is beginning to look within reach after months when the weight of its debt burden looked likely to tip the euro zone even deeper into crisis.

In spite of this month's mass downgrade of most euro countries by credit rating agency Standard & Poor's, Madrid romped through a debt sale on Thursday with support from cheap ECB lending to banks and steady interest from domestic investors.

The same factors should also help Rome.

Saddled with a 1.9 trillion euro ($2.5 trillion) public debt, Italy is the euro zone's third largest economy and investors have long feared it may prove too big to bail.

The amount of debt it must refinance between February and April looked almost unmanageable in November after international investors fled Italian bonds, driving even the country's three-year borrowing costs to nearly 8 percent.

But a fall in short-term yields after Italian banks awash with cheap ECB funds snapped up domestic bonds at recent sales has improved the market picture for Italy, now rated among the lower investment grades at BBB+ by S&P, on a par with bailed-out fellow struggler Ireland.

"I am convinced Italy can and will make it," said Intesa SanPaolo fixed-income analyst Chiara Manenti. "Recent auctions tell us tensions eased slightly. Looking ahead, the return of a net demand also on medium- and long-term maturities and a stop to disinvestments from abroad are crucial for Italy," she said.

Much hinges on efforts to persuade investors to accept deep losses on Greek debt, key to avoiding an unruly default there.   Continued...